What’s Gone Up is Coming Down? Vertical Mergers in the 2023 DOJ-FTC Draft Merger Guidelines
The economic theory of the firm teaches that vertical (and complementary goods) mergers differ fundamentally from horizontal mergers. Given incomplete contracting at arm’s length, improved coordination post-merger tends to increase competition and improve market outcomes in the case of vertical merger but tends to lessen competition and degrade market outcomes in the case of horizontal merger. Countervailing effects can of course reverse these tendencies, but rational merger analysis should take the fundamental differences of merger types into account.
The economic analysis of Section II.5 of the Draft Merger Guidelines (DMGs) conveys a rational—though incomplete—antitrust treatment of vertical mergers based on sound economic analysis. The one glaring omission in Section II.5 is the absence of any discussion of the elimination of double marginalization (EDM)—a feature typically inherent to vertical mergers and thus a procompetitive effect rather than an exogenous efficiency requiring separate evidence and analysis. EDM arises from improved coordination between the merging parties, with the salutary effect of increasing competition in the relevant market. EDM can manifest as improvements in the merged firm’s product price or non-price features. We urge the Agencies to add a discussion of EDM to Section II.5 of the DMGs.
Section II.6 of the DMGs, however, stands in stark contradiction to the economic analysis in Section II.5. The market-share threshold for a presumption of harm in Section II.6 has no support in either economics or legal precedent, and the “plus factors” when the presumption threshold is not triggered offer no reliable indication of competitive harm. We urge the Agencies to entirely eliminate Guideline 6 and the material in Section II.6 from the DMGs.